The 2009 Mortgage Bailout

The deep contraction in the economy and in the housing market has created devastating consequences for homeowners and communities throughout the country.

The Homeowner Affordability and Stability Plan HASP is an ambitious program by the Obama administration to address the mortgage crisis. It entails $75 billion in direct spending a $200 billion invested in Fannie Mae and Freddie Mac.

The Mortgage Problem

Millions of responsible families who consistently make their monthly payments have seen their property values fall, and are now unable to refinance at lower mortgage rates. Another 6 million households are behind on their mortgage payments and at risk of being foreclosed.

Lower house prices and affordable contracts mortgage rates have yet to stimulate housing demand. The average rate for 30-year fixed mortgages is at about 5 % which is near historic lows, but the Commerce Department reported that new home sales recently had their worst showing on records going back to 1963.

All homeowners suffer as homes in their neighborhoods foreclose. Each foreclosed home reduces nearby property values by as much as 9 percent.

President Obama's Solution to the Mortgage Problem

First The Homeowner Stability Initiative allows some ‘at risk' homeowners to refinance despite their owing more than 80 percent of the current value of their homes (under current banking guidelines these homeowners would not be good candidates for refinancing). Homeowners who owe more that 105 percent of the current value of their home would still not qualify but the administration says 4 to 5 Million homes will benefit from this new guideline.

Second The Homeowner Stability Initiative helps those who are behind on their payments and in bad financial situations to renegotiate their loans if they commit to make reasonable monthly mortgage payments of 31% of their pre tax income. Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

How does the Bailout Work Exactly for the Mortgage Consumer?

Basically the government will spend $275 billion to entice lenders to agree to these new rules and enticements to homeowners themselves to act responsibly.

The idea is that the lender would first be responsible for bringing down homeowner interest rates so that the borrower's monthly mortgage payment is no more than 38 percent of his or her income.

Next, the government would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent.

That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification.

Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with the government again sharing in the costs.

Lenders will be discouraged from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

Other Bailout Provisions

President Obama's plan has provisions that do not directly help the 'at risk' homeowners.

Require Strong Oversight, Reporting and Quarterly Meetings with Treasury, the FDIC, the Federal Reserve and HUD to Monitor Performance

Allow Judicial Modifications of Home Mortgages to Business Consumers During Bankruptcy for Borrowers Who Have Run Out of Options